Orion Engineered Carbons S.A. (OEC) Q3 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to Orion Engineered Carbons Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Wendy Wilson, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbons conference call to discuss our third quarter 2022 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, Chief Executive Officer; and Jeff Glajch, Chief Financial Officer. We issued our press release after the market posted yesterday, and we also posted a slide presentation to the Investor Relations portion of our website. We will be referencing this presentation during the call. Before we begin, I'd like to remind you that some of the comments made on today's call are forward-looking statements. These statements are subject to the risks and uncertainties as described in our filings with the SEC, and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, November 4th. The company is not obligated to update any forward-looking statements based on new circumstances or revised expectations. All non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table accessed to our press release. I'll now turn the call over to Cory Painter.

Thank you, Wendy. Good morning, everyone, and welcome to our earnings conference call. First, a big congratulations to the dedicated Orion team on our third consecutive quarter above $80 million of adjusted EBITDA. If not for exchange rate shifts in the quarter, this would have also been our third consecutive quarter of record adjusted EBITDA. Looking to the fourth quarter, we have lowered our full year guidance to $295 million to $310 million, still an increase of 13% over last year. It implies a roughly $55 million adjusted EBITDA for the fourth quarter. This guidance reflects a combination of seasonality and a weaker economy. There's a reasonable chance that customers will take longer holiday shutdowns this year. Next, let's pull back from the daily news in the fourth quarter and take stock of the broader situation. First, natural gas in Europe. We are ahead of plan in terms of reducing natural gas usage. Last quarter, we laid out sensitivities where there would be no financial impact below a 15% natural gas curtailment. With the progress the team has made, we don't expect a financial impact that gas - detailed as much as 25% to 30%. Furthermore, if we had to cut 40%, I'd say the impact would now only be about $2 million per month, which is half the level we shared last quarter. To be clear, however, we do not see that as a likely scenario, as weak [ph] generate electricity at all our European natural gas consuming sites, and we provide district eating at several locations. Beyond all that, we have further trials scheduled as we continue to progress this. And although we're very coy about gas black, I will share that we do not see our gas black production being impacted. Second, carbon black is an essential material. The majority of it goes into tires and tires warehouse during recession is two. We think OEM production will improve slightly in 2023, but we're doing well with today's depressed volumes. Specialty volumes will not be immune to a recession. But it's not like there's going to be some fundamental shift away from carbon black products in the world. Third, we made substantial progress in the 2023, '24 rubber negotiation cycle in terms of price, volume and payment terms. I say 2023 to '24 because taking Asia out of the equation, over 50% of our tire volume will be on multiyear contracts. Based on this, we expect rubber gross profit per ton to increase $80 to $100 next year. I don't think there are many companies with this kind of an upside for 2023, which brings me to my point. Our strategy is working. The pathway to a mid-cycle adjusted EBITDA capacity of $500 million is, as you can see, very much in place. The general economy may weaken in 2023, but we expect significantly increase discretionary cash flow and a reduced debt ratio, while we stay the course on our growth projects and execute on our share repurchase plan. And when I say increased cash flow, I'm not hoping for lower oil price, I don't believe and hope as a strategy. I'm saying better cash flow based on profitability closer to what we deserve. Meanwhile, we use any slowdown in the specialty market to improve our offerings there. While in the automotive space, the steady march of electric vehicle penetration will continue in 2023 and provide a tailwind to our conductive additives business. So on to the quarterly results on Slide four. Working together, the Orion team delivered another solid quarter following record first half results despite the effects of foreign exchange rates. Adjusted EBITDA of $80.5 million was up 21.2% year-over-year and gross profit per ton of $470.2 was up 12.8% year-over-year. Additionally, adjusted earnings per share is up $0.12 over last year, supported by an increase in pricing and improved mix. Year-over-year, all the metrics were improved with the exception of EBITDA margin, which reflects the dilution related to higher oil prices and our ability to pass those costs to grow. With that, I'll turn the call over to Jeff.

Thanks, Corning. On Slide five, we show a walk for Q3 adjusted EBITDA. The year-over-year volume increase in the rubber business were partially offset by softer demand in the specialty business. We had increases in the base price of both businesses, and we saw an improvement in mix and specialty. However, the strong U.S. dollar was an $11 million headwind in the quarter compared with last year. On to Slide six. Looking at our specialty business, volumes decreased year-over-year as well as sequentially. However, revenue did increase to $169.6 million, up 12.9% year-over-year driven by price and improved mix. Revenue decreased 6.8% sequentially compared with our record second quarter. Gross profit per ton continues to be strong, both in the quarter and the trailing 12 months. While there was a sequential reduction from the second quarter, you may recall that we noted in August, that the second quarter gross profit per ton was elevated due to strong mix and cogeneration profits. We expect that this would come back to a more normalized level in Q3. The continued improvement in gross profit per ton has been driven by price realization and the positive impact of newer products. However, in the fourth quarter, we expect gross profit per ton to decline significantly due to weaker volumes and lower cogeneration income. Slide seven shows the year-over-year walk of adjusted EBITDA for the specialty business. As noted earlier, volume reduction was significant. However, it is nearly offset by improved pricing and mix. Higher fixed costs were offset by improved cogeneration profit in the quarter. And finally, as noted earlier, the strong U.S. dollar was a significant headwind over $6 million. Slide eight shows the key metrics for the rubber business. Year-over-year volume increased over 10%, plus strong pricing and higher oil prices drove revenue to $373.5 million, up 53.8%. Sequentially, volume was flat and revenue increased 4%. Gross profit per ton was $364 in the quarter, a 33.8% increase year-over-year and 18% increase sequentially. We continue to see a nice upward trend in our trailing 12 months GP per ton to over $300. This results - this reflects results of the successful 2022 pricing cycle partly offset by cost inflation and air emissions control related operating costs. Cogeneration sales and profits were also strong in the quarter. Slide nine shows the year-over-year walk of adjusted EBITDA for the rubber business. Higher volume, base price and mix were all favorable as well as cogeneration profits. These were partly offset by a nearly $5 million headwind due to the strong U.S. dollar. On to Slide 10. Our consolidated year-to-date results have been strong, with revenue up 35.9% to $1.6 billion on essentially flat volume and adjusted EBITDA up to $247 million from $216 million last year. As we have noted a few times, we believe that we are entering this period of uncertainty from a position of strength - despite near-term challenges, we are well positioned to grow our business in 2023 and beyond and to achieve our long-term earnings and discretionary cash flow goals, which we laid out at our Investor Day earlier this year. We have seen a nice step-up in EBITDA this year and expect positive cash flow to begin in the fourth quarter and to continue into 2023. With that, I will turn the call back to Corning to discuss our guidance, capital expenditure and outlook for 2023.

Thanks, Jeff. Turning to Slide 11. As I said earlier, our full year adjusted EBITDA guidance is now $295 million to $310 million range, with a corresponding adjusted EPS guidance range of $1.75 per share to $1.90 per share. I'm pleased to say I don't have anything exciting to share about capital expenditures. The big debottlenecking project is complete. Several other projects are nearing completion. Looking forward to 2023, we only expect to have about $25 million of U.S. air emission control spending left for our final project. Next quarter will probably be the last time we call out U.S. air emission control spending as it is no longer particularly significant. As that activity tapers off, we expect to have the bandwidth and cash flow to take on some of our backlog of smaller high-value projects and execute on our share repurchase program. Turning to Slide 12. I've made these points already, but it's powerful to see it visually. With our value creation mindset, earned pricing and steady progress with our projects, we have the building blocks in place to reach our mid-cycle adjusted EBITDA capacity goal of $500 million by 2025. Despite the macroeconomic outlook, we are on track to increase discretionary cash flow significantly in 2023. As our cash flow improves, we will balance between investing in our strategic projects and returning cash to shareholders. The Board's approval of the $50 million share repurchase reflects confidence in our strategy and the near-term prospects. We believe, as I think many of you do, that the intrinsic value of the company and our projected cash flows greatly exceeds our share price. In closing, I'll leave you with a few thoughts. First, we are ahead of plan on reducing natural gas use and continue to work this. Second, we expect just $25 million of EPA project spending in 2023 as we wrap this up. Third, we made a step-up in adjusted EBITDA in 2022, and we will step up again in 2023. Fourth, this year's cycle for rubber contract negotiations are essentially complete, and we expect 2023 rubber adjusted EBITDA to be on par with last year's total company adjusted EBITDA of $268 million. Fifth, taking all of this into consideration, we expect to significantly increase discretionary cash flow in 2023. I see us as well positioned today for the global slowdown. Electrification will continue to drive demand for our conductive materials. The long-term disconnect between tire and carbon black investments support sustained pricing at higher levels. As I've mentioned before, the fundamentals are robust, and I believe they will be for years to come. Now, that ends our prepared comments. Before we go into opening up the lines for questions, we again received some questions overnight. And I think two of them in particular, we'll sort of be level-setting questions a broad interest. So let's start out with those. Wendy?

Thanks, Corning. One of the questions we got overnight was for Q4, could you kind of walk through the dynamics of we think is going to affect the quarter. And why will that not persist into 2023/

Got it. So the major factor for us in Q4 is volume with also some weakness in power rates in Europe, where we sell electricity from our cogeneration units. And if we think about volume, if you look at the Q2 results and the Q3 results, you can see there's been a weakening in specialty, that's been somewhat offset by strength in rubber. And that weakness for us was initially, I'd say, largely in Asia and China, in particular, and then became Europe as well. And what we've seen very recently is then that the North America follow that same trend. So October volumes were down for us in specialty. We had one large customer who took nothing that they ordered for November, but I think that December could be very much in question and that comment about that we made in the script about shutdowns. I think that's reflective of this. If you look at the broader picture, I'd say China, we started to see some green shoots in certain areas, in certain markets in terms of volume, but with zero COVID policy apparently remaining and the growing number of shutdowns there, I think that's kind of at risk. Europe was more or less stable and depressed rate for us as we see it playing out and then North America down. Rubber has been an area that has offset that. But we think in Q4, we're going to see a slowdown in European rubber carbon black purchases probably a mix of perhaps burning out some of their remaining Russian carbon black that can also be reflecting inventory in their own systems. If we then move forward to next year, we do think next year will be a robust year in terms of rubber carbon black demand. I'd say the weakness in Europe, maybe some of that continues on into Q1, but customer forecasts are very uncertain, some with quite a few caveats. And then if we think about specialty, well, I think this is going to follow the business cycle, right? It goes into many different end markets. Things like OEM will probably strengthen a little bit last year. But I think we'll see the broader economy go into a cycle, and I would reflect that to follow the broader economic trends.

Thanks, Corning. One other question that came in last night is related to the percentage of multiyear contracts for rubber volume for next year.

Okay. On that, we said in the script, it was a little bit over 50%. I would think for people's modeling just 50% for next year. One other question that came in for us that I think you should address is just what does this mean for rubber carbon black last year. We gave some more indications in the script. But Jeff, maybe you can just lay that out more clearly for everybody.

Sure. So if you think of rubber profitability to date. Our GP per ton has been about $340. I would probably use a similar number to get a full year GP per ton - if you recall, our GP per ton in the fourth quarter last year was pretty well so just over $300 GP per ton on a trailing 12-month basis we get to the end of this year, it should be closer to the kind of the 340 range that we're at right now. And then what does that mean for 2023? Well, Corning mentioned an increase of $80 to $100 per tonne. Nominally, if you think about 750,000 tons per year, that $80 to $100 per ton time 750 gets you about an incremental $60 million to $75 million of profitability in 2023. And then on top of that, we would think our volume will increase at least around 3,000 - about 30 tons next year, 3,000 tonnes. So at times that higher GP per ton would be about another $15 million of profitability. So we're looking at around $75 million to $90 million of incremental profit on top of this year, and that gets you pretty close according to the full year number of 268 that you mentioned earlier in the script.

And just those of us who like to think of 2019 as a good reference point for COVID. I will be also ahead of our total company 2019 number. Okay. So we just want to get those two out as a kind of a level setting. Let's open up operator now on the lines for questions from our investors.

Thank you. [Operator Instructions] Our first question is from Josh Spector with UBS. Please proceed.

Hi, thanks for taking my question. Just actually a follow-up on one of the ones you talked about earlier, just could be maybe more a bit more explicit on volumes for fourth quarter, specifically with specialty I mean given how 3Q came in, not sure how much of that is demand some deselecting from markets. What's the range you're looking at for fourth quarter for specialty? And I guess, how do we think about that in the context of the early part of next year?

Well, so again, I think that we'll see a significant drop or we will - our forecast and the significant drop we show in the run rate of EBITDA, some of that seasonality and some of that is just the weakness in the market. I would expect the weakness of the market portion of that continue into next year, and it's going to really depend upon where we see the overall economy. The majority of our drop in the fourth quarter is specialty volume complicated a bit by the power rates, but it's mainly volume there. There's some weakness in the rubber volume as well. Jeff, I don't know if you want to add anything more to that?

No, I think if you look at our volume in the third quarter, which had dropped obviously sequentially as well as year-over-year, we would see a little softness beyond that level.

Yes, really reflecting a slowdown at this point in the North American market is slowing.

Okay. Thanks. And I mean the commentary you gave on rubber for 2023 helps contextualize a lot of that pretty clearly. I mean, I guess if I step back and do some simpler math of annualizing or maybe slightly less simple math of annualizing fourth quarter, layering on some of that. It kind of seems like flat EBITDA year-over-year is a pretty negative scenario versus what you're putting out there. I guess, if I look at kind of what you have out there, maybe you're closer to mid-teens up in EBITDA in '23. Is that kind of what you're thinking in total as a reasonable base case? And if the economy improves, you can do better or are those kind of range or buckets way off versus your expectations here?

Well, so I think we've given an indication of what we think rubber is going to be, right? So you've got the 268, let's say, there's a benchmark out there. You've got the items that from Jeff. And so then when we come to the specialty side of it, I think you can look at the run rate we've got now, you can build in a weakening in the Americas portion of that, as well as power rates, which increasingly moved down quite a bit in Europe and take an annualization of that and it gives you a sense of where that could be. But we would expect that all to add up to a better year and improved cash flows from where we are right now.

Okay.

Does that help?

Yes, I'll turn it over.

Our next question is from Jon Tanwanteng with CJS Securities. Please proceed.

Hi. Good morning, guys. Thanks for taking my questions and congrats on the rubber negotiations and the multiyear contracts. That's really good work there. My first question is just on the buyback. I was wondering how quickly you expect to utilize that? Is that just an opportunistic thing, maybe off the solution? Or is it more aggressive in reducing share count as you think about that?

Sure. On the buyback, we are - our intent would be to get through the full buyback. First off, it is absolutely opportunistic, but we do - we put out that number not as a number that we're going to get at some point or maybe could probably our intention would be to fully execute that and really the timing of the speed of it will be contingent on a couple of things, one of which will be continued positivity on our cash flow, which we're pretty strong on. And then secondly, again, on buy opportunistically. But this is not a long window on that, that we'll be sitting here 18 months from now expecting not to have it, we expect to get much done than that.

Got it. Thank you for that. And then - you have a couple of facilities opening or expanding. I was just wondering how - what's the expectation for filling those? I mean when those will contribute to earnings just given the market situation, obviously, rubber is good, but specialties, the demand may not be there. Just how should we think about utilization and earnings contribution in the near term from them?

Right. So in terms of Ravenna, right, which is already up, we sold it out very quickly. We actually put more of that in rubber than in specialty because it was right after the invasion if you create in if you're supporting some of our tire customers with that, so I think that remains in pretty good shape. And I would just say, normalize the run rate and say that's in going forward in our rubber business. The big change for us is going to be the facility in [indiscernible] We had estimated that, that would contribute about $12 million of EBITDA for next year. I'd say with zero COVID we would now say maybe that's going to be high single digits to $12 million. We'll have to see how that plays out and maybe a little bit affected by the situation of rubber, carbon black for Russia as well.

Okay. Great. And just my last one. Where do you expect gross profit per ton in specialties to be roughly in Q4 maybe entering Q1, just from what you see today?

Yeah. So we have avoided giving specific guidance. We don't really want to at this point in guidance for next year. We kind of have done that for rubber. So I'd like to avoid doing that for specialty because it's kind of tantamount to the whole thing. But I would say that look at the drop that we have more in the fourth quarter and say that most of that is going to be in the specialty space. Most means, I don't know, 75%, 80% of it, I would think, is going to be in the specialty space.

Okay. Great. If I could sneak one more in there. What was your expectation for currency headwinds when you gave guidance at the end of Q2? Just trying to set it against your new guidance, where there's a $25 million headwind.

Sure. When we look at Q2, I think we were looking at - if you looked at where exchange rates were at that point in time, they were – and if you look at across the month of July and early August, they were around $12 million to $15 million -- and obviously, we're now sitting pretty much in parity.

But I mean, if you think about back to a year ago, just right, or when we gave guidance for the year, I mean, it's been almost a $20 million shift for us in FX.

Yes. If you look at the FX rates in 2022, and I believe I may be off by a $0.01 or so I believe they're about $1.18 euro to dollar. And now we're - this year, year-to-date, we're sitting at about 106. And if you take the current rate and extrapolate to the end of the year, you're probably at about 104. So that's a pretty big drop. That's about a 12% to 13% drop in the exchange rate year-over-year. And that's what's really driven the year-to-date and obviously, we'll see an impact in the fourth quarter also.

Got it. Thank you, guys.

Thank you.

Our next question is from Laurence Alexander with Jefferies. Please proceed.

Hey, good mornig. This is Kevin [ph] on for Lawrence. You may have - you actually touched on a bit of what I'm about to ask, but really just wanted to get a little bit more, I guess, more information on what you're seeing in terms of supply demand and dynamics in the different businesses you're in, I guess, in particular, Europe, I'm just curious to hear what kind of things you're seeing there? Thanks.

Sure. In Europe, I think these answers on specialty, almost all segments are down, okay? So that's pretty straightforward. That's been the case in China until recently, we've seen a couple of them come back up. We'll see what happens with the current COVID. In Europe, they all weakened [ph] And in North America, it probably started primarily in the polymer space, I think we'll see that be more broad for us. If we think about the rubber demand in Europe, so it's been an interesting year when the in Beijing first happened, there was sort of, I'd say, three part in were very concerned because they were some companies very heavily reliant on rushing carbon black. So they went through that phase. And if you look at some of the export data, you can see people were sourcing some from China, that dropped off after the course of, let's say, a quarter or two, Russian carbon black supply got really established, but everybody is uncomfortable with it from a security, from an FX [ph] from all types of different perspectives on it. So I think people have worked very hard to better get a range other supply arrangements thinking about 2023. So now when we think about the fourth quarter, and if you listen to some of the comments, the tire manufacturers have made seeing a slowdown in the European, let's say, passenger car market for that area, including replacement tires, then I think we see a weakness in that coupled with potentially people using up or taking their last straw on some Russian carbon black. That makes it a little bit hard to say, and customers aren't totally open about what their position is on that. But that would be my read of what's playing out there. So our impact might be a little bit more. Our industry's impact might be a little bit more than the general case from that point of view of using our Russian inventory or supply capability.

Thank you.

Our next question is from Chris Kapsch with Loop Capital. Please proceed.

Good morning. A couple of questions. So just curious within specialty, your grades that feed into automotive applications are said to be higher across a pretty big dispersion of profitability within that product line. And if you think about ‘23, most pundits [ph] are kind of expecting higher global auto builds, notwithstanding obviously some weakening what's going on in Europe. But I'm just wondering if there's a - a cushion to the run rate of EBITDA we should think about for that segment from mix feeding into what could be at least flat, but maybe higher auto builds globally next year?

Yes. So I think for the fourth quarter, to be clear, I think our GP per ton will move down in part on mix, in part though also just on lower volumes for just a modeling perspective. But when you talk about next year, you're absolutely right. And LCM, their forecast for Europe next year is gone up about 11% on the light vehicle manufacturing. And it's actually a very similar increase for North America. And we actually still are constrained in that space. Sometimes, when you're constrained, people put in a few extra orders because they want to get what they really need. We'll see how that plays out. But I think that yes, that automotive could be an area of strength for us and potentially, there's some other things happening in terms of supply and demand and a relative strength for us. We'll be debottlenecking one of our key lines next year. So that will also have the benefit of - of giving customers the confidence to design it into additional formulations, right? Because they can be more confident they can get all the products that they want going forward.

Got it. That's helpful. And then, just following up on the narrative around rubber for next year. And I apologize if you covered this in your remarks, I missed some of the comments. But I just want to understand, so the contract negotiations and the commentary about that pro forma [ph] commentary was for obviously the pricing but also higher volumes. And those contracts have typically been with Western producers, the Americas and Europe. And so I thought of Orion is being constrained in rubber volumes. So I'm wondering, you talked about higher volumes in rubber in addition to the pricing. So are you talking about in that context the addition of capacity in China? Are you also talking about higher contracted volumes that you'll somehow sourced from debottlenecking or operational excellence in your Western factories? Thank you.

Chris, excellent question. Thank you for that. So yes, some of that will be [indiscernible] and some of that going into the rubber market. But it's very important for us will be two other factors. We foresaw to weakness in specialty, particularly in polymer, some of those reactors can do either specialty or rubber and we made a decision early on, we would take that volume as rubber, and we shifted around some of the commitment on it. So that got us some additional rubber capacity. We also have some elements in operational excellence and so forth. And we have - when we say we're totally sold out, it's not necessarily every market, every place. I'd say in Europe, we had a little bit of room in North America, not a lot, but we did have a little bit of room with one couple of reactors in particular, where we were shifting them around to take advantage of some of the market shifts in the nature of North America. So all that combined, we'll see a b000enefit probably all in all, a little bit more, I'd say, in North America, China and Europe and probably in that order for us.

Very helpful. Thank you.

[Operator Instructions] We do have a follow-up question from Jon Tanwanteng with CJS Securities. Please proceed.

Thanks for the follow up. My question is just around the RCB number. You floated for next year that $268 million. Is that a minimum or a midpoint? And you mentioned a lot of headwinds there. Cogen's [ph] down, the dollar is stronger, Q1 to may weak. Just help me understand the risk to that number and kind of what you're building in there?

Sure. So we have thought about the risk factors on that when we gave you that number. So you should take that as a number. We have reasonable confidence in recognizing we're just at the end of Q3 right now, and it's a very dynamic world that we're in. A lot of the cogeneration pressure is going to be felt in our specialty area just because of the magnitude of that in Europe, vis-à-vis balance between specialty and rubber in Europe. But certainly, there will be some of that is a risk factor for us in that. But all in all, that reflects our sense of what we're really going to see in terms of volume and the pricing, I think, is really pretty secure.

Okay. Great. As we head into '23, just sorry to jump back to specialties. Are you still improving pricing there? And is the mix expected to be better compared to this year or maybe a little bit flatter?

I think mix is going to depend upon how the economy plays out and heavily like which market segments have the demand, right? We manufacture some very valuable, very distinctive, almost product-defining products. Obviously, if we add a lot more value to the customer, we get more value for our product and so the mix factor of what part of the economies are going well and not as well is really a dominant factor there. I'd say pricing [ph] in the more, let's say, polymer space in that master match, that sort of thing. A lot of our customers complain about a competitor being very aggressive in that space, that puts them under pressure. And I think that just in general, margins in that space are going to be more challenging, including for us.

Okay. And just as a reminder, do you actually play in that master batch market? Or have you pulled back from that just given the poor economics there?

So these are customers who compete with one of our competitors, and we support them. We continue to work with them in that space. That said, we did shift some of our capacity from lower-end specialty to rubber just because of number demand being more in rubber, as well as maximizing our own profit return on investment.

Got it. Thank you, guys.

I think we have one more coming in.

Yes. We have - our next question is from Ken Ajana with BX Credit. [ph] Please proceed.

Just can be acquainted to your name. So obviously, some of these are quite basic. But just in Europe, have you curtailed or are you looking to curtail anything on the specialty side? I guess, just trying to understand, I appreciate your comments on being able to operate or not having too much of a hit even on the 40% gas reduction. But is there any - so it doesn't sound like there's anything around curtailments? And just in terms of trade flows, if you talk to that a little bit in terms of - if anything, it's just been significantly in that region, especially it would be helpful. And then secondly, just around China, just trying to remind myself pro forma with new plans there, sort of what capacity - what percentage of capacity will be in that region and major sourcing, just from that region, just thinking of China becoming, I don't know, next prior states or - or just increasing [indiscernible] And so just any sort of impact from an event happening in that region would be helpful. And then lastly, just on your loans, if you have any caps in place on those, just switching up to fix and anything you can share on any strike would be helpful? Thanks.

Sure. So let me start with your first one around natural gas. We are not - we do not see ourselves having to constrain anything related on natural gas. We shared with you our success in cutting back our natural gas and substituting it with other ways basically to drive the reaction forward. We did get a high-level prioritization for our German facility from our utility. We generate - we co-generate electricity at all these sites. We provide district heating, which might not be a term everyone is familiar with, but this is kind of like a collectivized community hot water system. They send us cold water, we send them hot water for like building household heating. So I think with all of those things, it would make very little sense to curtail someone like us. And we've, I think, made that case effectively. Sometimes we get questions, is there a big cost savings associated with this? I'd say, at least at this point, look, there's also cost in making this change and some other impacts. So not a big cost savings impact for us there. There was a second part of that question. I found a little hard to hear. Let me just move to the second topic and that was China. How do we see the China risk and so forth. So the new plant that we're putting in is about 65 to 70 [ph] in capacity, on the specialty side is really aimed at making in China or China. We currently export into China from Europe, from North America, so actually, we would see having that kind of production in China and in this world of higher international friction to be a good thing for us. So we see that as a positive and a step forward for us. It also allows us to make in, for example, North America or North America specialty, where we've made some gains. Finally, on the loans. So we recently expanded our RCF. We said earlier in this call, we've made some progress on payment terms. Our RCF auction that was actually oversubscribed. I think we feel very comfortable with that. We got through 2020 really with no specific issues on that. No covenants wherever came into play that kind of thing. So I think all in all, the loan situation is I think, quite comfortable for us. But Jeff, anything you'd like to add to that?

Sure, Kevin. As I heard your question, I think you were asking about also whether or not we had whether it was fixed or not, we have hedged our term loans, and they are fixed out for different pieces for a number of years. The RCF is a variable rate. As Corning mentioned, we are utilizing a portion of that, and we have a much bigger capability than we had prior to the expansion of it. I would expect our RCF usage as we go through 2023, barring a dramatic change in oil prices, I would expect RCF usage perhaps will be flat to coming down some as we have positive cash flow. Obviously, we talked about the buyback and the intention of executing that buyback over the next few quarters in aggregate, but I don't think that that's going to impact our RCF going forward at all.

I think our improvement on payment terms and other factors around to just reducing accounts receivable will largely fund that.

Got it. Thanks. So just to clarify, so 100% of your year-on dollar loans are hedged or whatever the interest is fixed in those soft...

Through...

All right. Okay.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Corning for closing comments.

All right. I'd like to thank you all for joining us today and giving us some of your valuable time. I'd like to leave you with just this one thought. I believe that we'll be one of the few specialty chemical companies projecting higher earnings and improved cash flow next year. I think that's a real positive. And I leave you with that. Thank you very much, and look forward to speaking with you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.